The Markets Won't Get Fooled Again

It's as if the US market responded to the Shanghai shakeout by saying "Been there, done that; we won't get fooled again."

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There's nothing in the street Looks any different to me And the slogans are replaced, by-the-bye And the parting on the left Is now the parting on the right And the beards have all grown longer overnight--Won't Get Fooled Again (The Who)

"He awoke one morning from uneasy dreams, he found himself transformed in his bed into a gigantic insect."--Franz Kafka (The Metamorphosis)

On Wednesday the bulls snatched victory from the jaws of the bears. It was the type of day that will be ingrained in traders' DNA for the rest of their lives. Not because it finally marked a new closing high for the S&P besting the March 24th, 2000 closing high, but for another reason. It was a day that defines unequivocally how the trend trumps the news. Wednesday defines how accelerated momentum dwarfs all other considerations, news, technical expectations and all other trappings of rationality.

As I said in yesterday's column, in bull markets bad news is good, and good news is good. Wednesday was one for the book. A day that all traders will remember because against all odds and expectations, on the heels of a Shanghai slam-dunk – down six percent overnight – the S&P scored a new record closing high. It was a day where the music of money and the chorus of momentum defied any illusion of clarity in the market. It represents a metamorphosis of value. It represents a transmutation of the concept of true and false, where true and false are forced to change places.

Wednesday was a day that shattered any illusion of being "in control," any illusion that Mr. Market isn't the boss. A day of despair for the bears that comes out of the awareness that their stance of conqueror of irrationality is an illusion and that we are not masters of our fate and captains of our ships. The same lesson applies to the bulls albeit the sound of ka-ching drowns out the fear of how easy it has been to make money.

The lesson is the market can and will toss players around on its seas and crash them on the rocks of rationality like a dime store toy.

In a nutshell, it was a day that proved that even if we could make a pact with Lucifer to own tomorrow's headlines, there is no guarantee that we would be able to decipher that knowledge into realizing a profit.

Wednesday was a day where the market shouted at participants in its best Jack impersonation, "You want clarity? You can't handle clarity." In short it was a day where all traders have to question what really matters.

Considering what happened in February, if we had had a headline referring to China's overnight sell-off, the majority of players would have been outright bearish and looking for the markets to get clobbered as they did in February and March. To be sure, stocks opened down but found low within the first ten minutes. That was it. That was the whole decline in reaction to China's six percent sell-off.

It's as if the US market responded to the Shanghai shakeout by saying "Been there, done that; we won't get fooled again."

In other words it feels as if the Street observed how the sell-off in February/March played out and has matriculated. It has once again learned that Buy the Dip is all you need to know to graduate with honors. It has TiVo'd 1999. No, the Street won't get fooled again.

Although many of the pundits will point to the FOMC minutes on Wednesday as a catalyst for the upside reversal, the fact of the matter is that the rally got started before the minutes were released. The fact is that the S&P flip-flopped like a fish out of water on the release of the FOMC minutes before accelerating. The fact is there was nothing new in the minutes. Although the bulls interpreted the statement as a green light to gun the market because the Fed said that the economy is slowing down, that the housing slump would be steeper and longer than expected, and that they continue to be concerned about inflationary pressures. There's nothing new there. It is crystal clear: they're talking hawkish and walking dovish, again.

Once again, the S&P was protected by Hoofy as it opened on its 20 DMA. Now, there are three lows at the at the 20 DMA. In May clearly underscoring the importance of this M.A. if it should be violated.

Nevertheless, Hoofy had an agenda. Once the neckline on the hourlies at 1522 S&P was recaptured a new closing high on the S&P was simply a fait accompli'. And so it was. Isn't it ironic that it occurred on a day after the Chinese market sank six percent? Go figure.

When the Neckline at 1522 was offset, the die was cast for a new closing high. This 10-minute chart shows how volatility has accelerated in the past week.

A day that started out raw with fear ended with confetti. Once again conventional wisdom was aced by the counter intuitive, as confidence flushed with cash strutted its stuff. And so it is the inclination becomes less and less hard to believe that this time is different because there has been a lot of variation around the normal trend.

As mentioned yesterday, it seemed reasonable enough to believe that the market had a date with destiny – a new all-time closing high and a new intra-day high. Wednesday seemed to be the starting gun of that rush for the roses and date with destiny. Wednesday represented an inflection point – you'd have to be deaf not to hear the sound of the bears throwing in their towels. Once the market went from red to flat to green, the ultimate short squeeze erupted, with the bears now trying to chase the long side as last Thursday's reversal was itself reversed.

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